Counting the cost of staying in the omni-channel game

On Monday Carrefour's new CEO Alexandre Bompard presented his five year plan for Europe's largest food retailer, the highlights of which were €2bn in cost savings, a focus on quality food sourcing and traceability, a tie-up with Tencent and Yonghui in China, and €2.8bn investment to accelerate ecommerce with the aim of achieving the same share of the French grocery market online as it currently has offline (20%). The plan was well received by shareholders, sending the share price up 6%.

While the ambition and broad outline of Bompard's plan appears admirable, commentators and investors seem to have missed a rather important, not so positive point. What Carrefour has just done is to quantify how much the growth of ecommerce is adding to the cost of staying in the game (i.e., maintaining market share). For investors, that means €2.8bn of incremental opex and capex (the mix is as yet unclear) to be deducted and added respectively to the top and bottom parts of the ROI calculation. While overall annual capex is being cut by 10% to €2bn, this is at the expense of organic growth from new stores and remodelings. 

We’ve already seen the impact of this increased "pay-to-play" rate in the UK grocery market, where margin pressure arising from the online race space that kicked off over a decade ago was one of the factors that made market "leaders" Tesco and Asda reluctant to take pre-emptive price-cutting action to stem the growth of Aldi and Lidl in the wake of the 2008 financial crisis and recession. 

A similar space race is now about to occur in France, driven by Carrefour trying to play catch up with Leclerc and the fear of Amazon ramping up its grocery presence. Ditto the US, where Kroger’s CFO already warned at quarterly results last September that the expansion of Clicklist is a drain on store profitability.

There's no doubt that ClickList is a headwind on earnings currently and we've even continued to accelerate the speed in which we put ClickList in, so it's an incremental headwind,” Kroger said. And that’s despite them charging $4.95 for the service, which is free at Wal-Mart, and before i) the acceleration of home delivery, which surveys show is preferred to click and collect by three-quarters of US consumers in markets where they have the choice; and ii) Amazon integrating Whole Foods properly.

In my view the increasing cost of staying in the omni-channel grocery game is going to be a bigger issue than the growth of Aldi and Lidl in the medium-term. The only way out is to automate online order fulfillment down to the store level, so you are leveraging instead of deleveraging existing fixed assets, and to shift the corporate mindset from optimisation of the existing business model to fundamental transformation.

Such reinvention by incumbents from within is of course notoriously hard to contemplate, let alone execute.  Currently it is the former "pure online" players such as Amazon and Alibaba that are leading the transformation of grocery retail. This may help explain why the world's biggest brick and mortar players are suddenly rushing to form partnerships with their online counterparts, i.e.: Carrefour - Tencent, Walmart - Rakuten &, Kroger - Alibaba. These look like smart strategic moves and on paper such combinations have many attractions, if the cultural and organisational challenges can be overcome - the $trillion question. 

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Amazon's acquisition of Whole Foods taking us back to the future of food retail?

Most commentators see Amazon's bid to acquire Whole Foods as a game-changing if opportunistic move, with a minority in useful disagreement. The consensus is that Amazon probably does not yet know exactly what it wants to do with Whole Foods, but will experiment until it finds the best way to fulfill its prime aim of satisfying customers. However, to my knowledge no-one has attempted to describe in any detail how Amazon could leverage the stores as delivery hubs more effectively than brick and mortar operators, or question the extent to which the technology being used at its "Go" trial stores could be scaled up to accommodate a much larger range of products, including loose produce and items from service counters, that are a fundamental part of Whole Foods' stores and brand equity.

The first issue depends at least partly on how efficient Amazon's Kiva robotic picking system is compared to others that are aimed specifically at the grocery market. Any advantage Amazon may have today could be negated by next generation systems currently in development, especially if they allow cost-efficient automation at store level.

The second question regarding the scalability of "Go" technology is more difficult to answer, especially as it has yet to be proven effective at the trial stage in very small stores. My belief is that the current configuration of sensors and cameras etc will only work for a limited range of packaged goods - i.e., a convenience store format. However, that does not mean that Amazon will not find other ways of automating the tedious parts of the grocery store experience, notably the selection of center store products, and checkout. 

This leads to the question of whether Amazon will reinvest cost savings from automation to retain or even augment the high touch, human element that differentiates good stores in general, and Whole Foods in particular, from online and offline competitors. CEO Jeff Bezos's oft-quoted (by me at least) view of staff as "annoyingly variable" would suggest not. On the other hand, if he wants to deliver on his prime purpose of customer satisfaction, cutting out the human aspect of personalised service is probably not a good idea. 

Traditional food retailers looking for the usual easy ways to cut costs may want to reflect on this as they wait to see how the Bezos-Mackey marriage works out. 



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Time to react to the elephant in the online grocery room

A recent report from Nielsen & FMI projects that 20% of grocery sales in the US will be made online by 2025. What I find amazing about this prediction is not the figure itself - which is really anyone's guess - but that no-one has commented on the impact this would have on sector profitability. The unfortunate fact is that unless there is a significant reduction in physical floor space and/or major change in order fulfillment methods, and assuming home delivery becomes the dominant model as it has in the UK, a 20% online shift would result in supermarket industry profits falling by up to 50% due to i) the incremental costs of running dedicated picking centres and ii) deleverage of store fixed assets and costs. (Note the detailed modelling behind this estimate was one of the last pieces of work I carried out as a financial analyst and was one of the reasons I changed career to try to bring some solutions to what I call the "online cannibalisation conundrum".)

That such a future is just too bleak or remote for industry executives to admit publicly or even contemplate privately is understandable. However, one would think that external industry consultants and commentators could apply their critical facilities to alert others to the glaring elephant in the grocery room - i.e., the fact that for the grocery market as a whole online adds cost and complexity but not sales and hence will inevitably dilute margins. (This applies even to first-movers, whose advantage tends not to last very long as competitors react aggressively to prevent their high spending online customers from defecting.) Their collective failure to do so reflects either a lack of understanding of the economics of multi-channel grocery, or a fear of offending current or potential consulting clients by being the first to bear such bad news without being in a position to provide a solution. Either way, the silence is unhelpful for the industry and needs to be broken. 

These days most of the commentary regarding threats to traditional grocers relates to the expansion of limited assortment discounters Aldi and Lidl (the LADs). There is indeed a link between the growth of the LADs and online. One of the reasons the big Four UK supermarket groups failed to cut prices quickly enough to stem the LADs' growth during the post 2008 recession was the increasing extent to which they were having to subsidise the fulfilment of online orders. In the battle to attract/retain high spending online customers, the average fee for home delivery fell from £6 in 2008 to just £2 by 2013. Meanwhile, market leader Tesco was busy building large dedicated order fulfilment centres in order to ease the pressure on in-store picking (which Tesco found starts to impact the store experience for regular customers when online sales penetration reaches around 8-10%). Whatever gains were made in picking productivity were far outweighed by the additional costs of running these new facilities, and longer, more expensive delivery routes. Furthermore, this increasing investment in making it easier and cheaper for customers not to come into their stores was being partly funded by cuts to staff and hence service in stores, thus narrowing one of the mainstream supermarkets' main points of difference against the LADs.  

With Amazon now accelerating its move into grocery with not just Fresh but also Prime Now, Pantry, Dash, and plans for various types of physical locations, it is high time for food retailers' online strategy to include more than just connecting with customers digitally and allowing them to order online for pickup at store or home delivery. They need to start thinking about the longer term financial implications and looking for solutions for a problem that has already decimated the profitability of UK supermarkets and still has a lot further to go: the simultaneous growth of LADs and online.

Is anyone listening I wonder...  

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Amazon's stepped-up grocery drive to accelerate online space race

According to an article published a few days ago in the WSJ that has attracted a lot of attention, Amazon is planning to open convenience stores selling perishable items such as milk, meat, fruit and vegetables. Customers will also be able to order packaged goods with longer shelf lives for same day delivery, using their mobile phones or possibly in-store touch screens. The report, whose main source is "people familiar with the matter", notes that these stores may take a year or more to open while the company scouts locations and the plan (known internally as "Project Como") could be shelved because of financial or operational concerns. 

That Amazon wants to test brick and mortar locations to help expand its Fresh business should not come as such a surprise. Previous reports earlier this year already identified two locations in California (Sunnyvale and the Bay area) where Amazon appears to be developing drive-up grocery pickup locations, and according to the WSJ article one such site is due to open in Seattle (where Amazon Fresh was first launched) in just a few weeks time. Enabling pick up at or delivery from physical sites near customers' homes is the best way for Amazon to lower last mile fulfilment costs and to try to eliminate one of traditional supermarkets' main advantages over pure online.

The very limited rollout of Amazon's lockers in 7/11 stores in the US suggests this model is not working particularly well, for non-perishables at least. Nor is it very scalable, given the stores' tiny size. However, combining online orders with walk-in sales from custom-built stores is already a profitable model for California-based hybrid supermarket chain There could be significant potential advantages from configuring sites and managing inventory in a way that leverages Amazon's particular logistical capabilities and customer insights. What is not yet clear is the part that Kiva, the robotic picking company Amazon bought four years ago, will play in assembling online grocery orders more efficiently and the extent to which this activity may be automated at the store level. 

What is clear is that this latest news, coming on the heels of a shift in Amazon Fresh's pricing model for home delivery from a yearly subscription of $299 (including Prime) to a monthly fee of $14.99 (on top of $99 a year for Amazon Prime) and the recent integration of Amazon Fresh into's main website, signals an acceleration in the online grocery space race in the US. The online giant's moves coincide with Walmart's aggressive rollout of free curbside pickup and last week's statement by its new head of e-commerce Marc Lore: "We're going to be really focused on winning in fresh and consumables over the next couple of years."

The US market is entering the phase where downward pressure on service fees and much greater availability and quality of online fulfilment options combine to drive greater customer take-up for online grocery. While this is good news for time-pressed grocery customers, it presents a major challenge to grocers' profitability, as the subsidy they will have to pay just to keep their valuable multi-channel shoppers rises.

The desire to maintain profitability in the face of rising e-commerce costs is one of the reasons the UK's major grocers (including Asda, a Walmart subsidiary) failed to cut prices in time to slow the growth of hard discounters Aldi and Lidl. It will be interesting to see how US grocers deal with the twin threat that is now headed their way. 

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More twists in the tale at my local Waitrose

In a previous blog ("A new meaning for customer service") I described how during a visit to the fish counter at my local newly renovated Waitrose I ended up advising the nice young lad working there (I'll call him Bob for now) about the benefits of Cornish sardines (they are brilliantly cheap, sustainable, local, healthy, tasty and easy to cook), and how I'd had to leave a queue of customers that started forming who were eager to share in this information. 

What happened on my next encounter with Bob the apprentice fishmonger was even more enlightening. As soon as he saw me approach the counter, his face lit up and he greeted me with "Hello, you're the sustainable fish guy!" He then said that what I had told him last time had led him to do some research on his own to support what he had heard from me. I told him well done and that I was happy I had piqued his interest to such an extent. So far, so uplifting. 

On the following occasion that I visited the fish counter, it was manned by one of his young colleagues, while our friend Bob was further down serving customers on the deli counter. So I asked the new guy if he could tell me which fish were the most sustainable. As he drew a blank, I called across to Bob to ask if he could help enlighten his colleague. Looking quite chuffed Bob replied "The sardines or mackerel". However, when I asked why they were so cheap and sustainable, he looked less happy, muttering that he had forgotten exactly why. Ditto when I followed up with a question about the health benefits of these oily fish (Omega 3 good for the heart and brain).

On the one hand, this experience shows how a little knowledge can be enough to stimulate someone's natural curiosity, especially when it makes their job more interesting and rewarding. On the other, it highlights the importance of on-going training. Unless people are actively encouraged to learn more and put their new knowledge into practice, both the curiosity and knowledge can wither away.

In the context of supermarkets, which employ more people than any other private sector doing (let's be honest) mostly tedious tasks, the fact that those on the frontline (i.e., cashiers and shelf restockers, not just those working on service counters) often know less about what they are selling than their customers surely represents a huge waste of pent-up curiosity and energy. Or viewed more positively, a tremendous opportunity - especially given the introduction of the Living Wage and apprenticeship levy. In the meantime, I look forward to chatting to Bob and his colleagues more often. 


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The meaning of training

According to Deloitte’s 2015 Global Human Capital Trends report, one of the main reasons many employees aren’t engaged is they feel their work lacks meaning. The desire to do work that matters is particularly strong among millennials, with 77% saying part of the reason they chose to work where they do is the company’s “sense of purpose.”

Meanwhile, according to a report from Grovo, training and development is the #1 perk millennials seek in prospective employers—many want it more than pension plans or even cash bonuses. 72% of employees say they value on-the-job training more than a college degree. 

Now think what proportion of employees in large grocery chains who are on the frontline with customers (i.e., cashiers, shelf restockers) feel they are doing really meaningful work or are given access to regular on-the-job training? Is it any wonder their turnover is so high and engagement so low?

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Mind the gap!

On a recent trip to Germany I had two conversations that highlighted a deplorable level of ignorance regarding nutritional health even amongst highly educated people in developed countries. 

The first was with an oncologist, who admitted she knew virtually nothing about nutrition, except that it was important to eat healthily (whatever that meant). She was however keen to learn at least the basics to be able to pass onto her patients. Like most people I've met (including senior supermarket executives) she used extra virgin olive oil for high temperature cooking such as frying, thinking it was healthy. After I explained why that was not such a good idea due to the low smoke point and potentially carcinogenic by products that are formed, she spent the next half an hour asking me more questions and made me promise to send her a list of useful nutrition and food preparation tips. 

The next day another friend who works at a senior level in one of the German government ministries told me how appalled she was when she found out that the food being served to her child at the (office-sponsored) creche consisted mainly of chips, fizzy drinks, ice-cream and sweets. When she tried to enlist the support of her (presumably similarly highly educated) female colleagues who also had kids at the creche, they couldn't understand what the problem was, as this diet was similar to what they gave them at home. 

If someone who has trained as a doctor and specialises in treating cancer patients knows almost nothing useful about the impact different foods have on the body and has to resort to getting tips from relative layperson, and highly educated civil servants don't see anything wrong with giving their children junk food, isn't it a sign that there is a huge market waiting to be filled? What an opportunity for supermarkets to change from selling food as a commodity to providing a hugely value-added service at the point of sale, by teaching their staff the basics of how to better choose, use and preserve food. Thereby turning millions of tedious jobs into a stimulating, engaging and empowering career while at the same time earning the lifetime loyalty of their newly stimulated, engaged and empowered customers. 


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The inconvenient truth about multi-channel grocery today

"In an age where food retailers have the opportunity to forge a connection between shopper interest in obtaining quality food and beverage products, engaging shopping experiences and authentic narratives behind products (all of which benefit from human interaction) and the store, it is interesting to watch these same retailers seemingly obsessed with finding ways to make shopping more “convenient” so consumers can get in and out of their stores more quickly—or stay away altogether."

This quote from a Forbes article earlier this year on the growth of Instacart and other grocery home delivery services in the US summarises the main problem with the approach the majority of food retailers are taking to multi-channel today. The desire to either gain first-mover advantage or not be left behind in the great new online space race - because that's where the "growth" is, even if it will inevitably come from stores - has led to a sudden increase in the focus and resources allocated to e-commerce. However, attempts to make the in-store experience more appealing - for instance by teaching customer-facing staff more about what they are selling - have lagged behind. Apart from shorter checkout queues, self-scanning, and access to the odd dietitian (for the very dedicated and lucky), what has really changed about the in-store grocery shopping experience in the last 100 years?

More fundamental change in-store is however inevitable, given that for the grocery market as a whole, online  adds more costs and complexity than sales, compressing margins, even for first-movers (such as Tesco in the UK, still the world's largest online fresh food/grocery retailer). Better to face up to this inconvenient truth sooner rather than later. 

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